Falling into 'fuel poverty'

More middle-income households crushed by home energy costs

By

StephanieI. Cohen

PRINCETON, N.J. (MarketWatch) -- Monthly home energy bills are eating up an increasingly larger portion of household incomes, creating an "energy burden" that has many American's dipping into their savings and using credit cards to pay higher heating and cooling bills.

"Fuel poverty"' has been a major policy area overseas, especially in the United Kingdom, with the term first appearing in the 1990s to denote families that used more than 10% of their income to pay for home energy costs.

But research into the impact of energy costs on American consumers and the inability of U.S. households to pay fuel bills is now attracting more attention, especially as middle-class families show signs of struggling to pay bills for basic necessities such as heat and gasoline with costs surging over the past five years.

Rising energy prices are nothing new. What is new for some households is the combination of steep increases in heating and cooling bills along with an economic downturn, job cuts, higher food costs and mortgage woes. This confluence of factors has helped pushed more families across more income levels into an uncertain position when it comes to paying their energy bills,

"It's a problem of stagnant income and unaffordable housing," said Meg Power, who authored a report from Economic Opportunity Studies on incomes and energy costs.

There is a growing consensus that energy burdens will increasingly be felt by families not traditionally viewed as "poor," namely middle-income families that will need to stretch to pay sharply higher bills this winter.

Roger Colton, one of the founders of the economic and legal consulting firm Fisher, Sheehan & Colton, said there are signs that "the [energy affordability] gap is reaching into more moderate income households."

Power said energy affordability "already has affected the middle class."

A home's energy burden is the portion of disposable income used to pay heating and cooling bills over the course of a year. For families that don't have sufficient income to pay these bills the burden becomes an "energy affordability gap," according to experts. Not surprisingly, the energy burden tends to be most significant for families at the lowest income levels.

"In fiscal year 2008, the gap between incomes at the bottom of the national income range and energy prices continues to widen," said the report published this year by Economic Opportunity Studies, a Washington-based nonprofit research group. Power said many low-income families have "hit the breaking point."

A report from the federal government's Oak Ridge National Laboratory released in January found that the price increase for both natural gas and residential heating oil over the past decade "has outpaced the increase in purchasing power of low-income households."

Rough winter ahead

Family budgets are expected to be squeezed even further this winter, and in Washington there is concern that some families will be unable to finance heating bills that could reach record levels.

"Decisions about buying heating oil can be tough in any year, but with current high and unpredictable oil prices, the decision this year may involve considerably higher stakes for many family budgets already squeezed by broader economic and energy trends," according to a report issued last week by the Energy Information Administration, the statistical arm of the Energy Department.

States are also increasingly concerned about the impact high energy prices are having on residents. In Massachusetts, consumers have been told to expect a big bump up in heating prices over the next two years.

"A significant number of Massachusetts households will have severe difficulty heating their homes during the upcoming winter because of rapidly increasing costs," according to a report released by the Donahue Institute this week. The bill for Massachusetts' households heating with oil and natural gas is projected to rise by $1.4 billion over the next two years, the report said.

In Ohio, 2.3 million households with annual incomes below $50,000 spent roughly 19% of their after-tax income on energy in 2007, including electricity and gasoline costs, according a report released in February by Americans for Balanced Energy Choices, a group that represents companies that produce electricity from coal. The average Ohio family with an after-tax income of $51,736 spent more than $5,000 on energy bills, or 10% of the family budget, according to the report.

Defining an affordable energy burden

Five years ago, the firm Fisher, Sheehan & Colton decided to quantify the shortfall many American consumers' experience when trying to pay their fuel bills. The firm calculated the difference between "affordable" home energy bills and "actual" home energy bills for every county in the country and coined the phrase "home energy affordability gap" to explain the deficit.

The group's initial report using 2002 energy prices pegged the annual U.S. energy affordability gap at $18.2 billion. The most recent report released in 2008 (using 2007 energy prices) said the gap had jumped to the equivalent of $41.2 billion. In New Jersey, for example, households with incomes below 50% of the federal poverty level paid 68.5% of their annual income in 2007 toward home energy bills, according to Fisher.

"The story is the gap is large and it is growing," said Colton. He predicted that the gap will increase again in 2008.

The model developed by Fisher puts the "affordable burden" for home energy bills at 6% of gross household income, though not everyone agrees on exactly how much is too much when it comes to energy costs. Households considered "severely burdened" by energy costs in the Donahue Report were low-income households that spent more than 5% of their income on oil heat bills and low-to-moderate-income households that spend more than 10% of income on heating oil.

"The total aggregate cost of residential energy for low-income consumers ... will increase by $6.8 billion during the year ahead, from $33.5 billion to $40.3 billion, assuming normal weather conditions," the report from Oak Ridge National Laboratory said. "Seventy-two percent of the increase will be borne by the 53% of low-income households that heat with natural gas," the report added.

The scale of recent energy price increases has also started to pose a greater threat to low-income families with higher income levels. "The impact of the increase in home energy prices has been to push upper income households" among the working poor into the position of being unable to pay their energy bills, Colton said.

Oil hits the pocketbook harder

The type of heating fuel a household uses and the region in which a family lives also affect the size of the energy burden. Households that heat with oil and families that live in the Northeast face perhaps the grimmest outlook this year.

"Heating-oil customers are likely to be particularly hard hit," the energy department said in its most recent weekly petroleum report. This winter the agency predicts heating oil prices will average $4.65 per gallon, compared with $3.28 per gallon last winter season.

Still, homes that rely on natural gas and electricity for heating aren't expected to fare much better. "This trend is expected to continue into 2009, with oil prices projected to rise 10.75% from 2008, and gas and electricity prices projected to rise 15.6% and 7.6%, respectively," the Donahue Institute report said.

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